Amid record vacancies, Class A rental rates plunge 56%.
Commercial real estate, particularly office space, in Calgary, Alberta, the epicenter of the Canadian oil bust with 1.2 million people, is collapsing at a breath-taking rate. As companies in the oil & gas sector have downsized or gone out of business, 25,000 people who used to work downtown have lost their jobs.
Office vacancy rates have soared to 22%, the highest on record, according to the second quarter report by commercial real estate services firm CBRE.
Vacancy for Class AA office space reached 17.6%, and for Class A space 18.9%. Older buildings are getting clocked: Vacancy rates for Class B buildings soared to 32% and for Class C buildings to 28%.
It’s going to get worse: three towers with 2.3 million sq. ft. of office space are under construction in downtown and will be completed by 2018. Of this space, about 1 million sq. ft. is not leased. And even some of the pre-leased space may end up on the sublease market.
Colliers International in Calgary estimates that the overall downtown vacancy rate will approach 26% by year-end 2018. How optimistic is this estimate? A year ago, we reported that Colliers had estimated that the vacancy rate would hit 17.5% by year-end 2018, with the warning that “this may even be an optimistic forecast.” It sure was.
The sublease market is the crux. Sublease space can appear out of nowhere overnight. During the good years, amid a perceived shortage of office space associated with a notion that rental rates will only increase, companies leased more space than they needed and warehoused that space. But now, the hard times, they dump this space on the sublease market, which now accounts for 42% of total vacancies.
The Financial Post adds some details:
This week, TransCanada Corp. put 11 floors of office space back on the market in an attempt to find a tenant to sublease their office space in a 25-floor building. As TransCanada moves out and consolidates its staff at or closer to its headquarters, the older building’s vacancy rate will rise to over 50%, with more floors available in 2017.
A few blocks south, Brion Energy Corp. is poised to move out of Encana Place and into a new tower, which would leave its current address more than 90% empty and only the building’s landlord, Aspen Properties Ltd., in the 30-story tower.
Many other towers are over half empty, and energy producer’s efforts to control real-estate costs is putting pressure on landlords at both old and new buildings.
Only one tenant, for example, has moved into Eau Claire Tower, a 25-floor building completed in 2015. Peyto Exploration and Development Corp. occupies two floors in the glass tower, which is fully leased but currently sits 90% empty.
Rental rates have collapsed. Landlords are desperately trying to fill some of this space by slashing rental rates. Quoted Class A rental rates have plunged 56% from $40 per sq. ft. in 2012 to $17.50 now, lower even during the brief oil bust and the Financial Crisis when rates bottomed out at $20 in 2009.
And it’s even worse:
“Not only are the rental rates lower, but the inducements to individual tenants for improvements and/or free rent are all going up,” Randy Fennessey, president of Colliers International in Calgary, told the Financial Post.
Fennessey said that landlords would rather sign a lease with higher contractual rental rates and then give tenants the option of moving in a year early free of charge rather than drop their prices. Tenants in the energy sector currently looking for space, he said, have been taking those deals with the expectation that the worst of the downturn is over.
“That’s a common negotiating tool today because a lot of tenants, particularly in the energy sector, are trying to control their general and administrative costs,” Fennessey said.
So how long might it take before vacancy rates fall back to 10%? Colliers Q2 report, cited by the Financial Post, offers a glimpse: “at historical absorption rates, it could take five to 10 years….”
Now there are discussions that the solution might be to tear down some of the older towers, a number of which have vacancy rates over 50%, or convert them into condos in the hope that by then there will be buyers. Calgary Economic Development CEO Mary Moran put it this way: “There are a lot of people in Calgary that would say, ‘We’re not overbuilt, we’re under-demolished.’ So there are some products that probably could go.”
Of the big cities impacted by the Great North American Oil Bust, Calgary is ahead of the curve, being so heavily focused on oil, particularly on tar sands production, the global high-cost producer. Houston, the epicenter of the oil bust in the US, is more diversified. But it too can no longer shrug off the impact. The oil bust in the 1980s made its way into the broader regional economies via real estate, banks, and unemployment. And Calgary shows that this oil bust is sending out similar ripple effects that will take years to overcome.
The financial bloodletting is far from over in the US and Canadian oil patch. Read… Great American Oil Bust Rages on; Defaults, Bankruptcies Soar
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Sounds like Calgary has a great advantage over a place like Vancouver or Toronto for anyone wanting to start a business.
In this globalised world we live in location is nowhere near as important as it used to be and low real estate costs would have to be a huge draw against overpriced markets all around.
That’s exactly how downtown Detroit attracted Bay Area software developers and others who don’t have to work in a corporate office and who wanted to escape the high costs here. By now, that pocket of Detroit has become vibrant again.
That said, I would never compare Calgary and Detroit. They’re two entirely different animals. I just want to confirm your point: low cost will eventually attract activity if the right conditions exist.
Detroit is the perfect city for any data center. It is freezing most of the time, has plenty of available space, good infrastructure, a major airport, and is centrally located. Motown should become Servertown.
Ah yes, the McNamara terminal, the Delta hub. It beats anything we have here in SF.
excellent idea, really good, and kinda central, too.
and greenhouses can be heated with the heat given off.
In a conversation i had with a hedge fund manager in 2010, I suggested that Detroit would be the perfect city for a free trade zone for the reasons you list, Petunia. To my amazement, he agreed (I’m full of crazy ideas that people denigrate). The problem is ALWAYS politics. Those blood suckers will destroy the whole country or die trying.
There is a distinction between Detroit and the Burbs. The burbs like Troy, Bloomfield Hills, Ann Arbor etc are really nice places to live. Low cost, low taxes. If you can deal with the winters. It’s unfortunate Michigan is so often equated with the problems of Detroit.
…except that with the prevailing low prices there is no economic justification for any more “activity”.
Try living there for a year. You’ll see
There is a great used record store in downtown Calgary. My son took me to it several years ago on a visit. I guess now we can pick up some nearly-new office furniture to go with the collector albums.
Seriously, this was an encouraged development spree that was totally bought into by all sectors. People were led to believe, and led themselves to believe that the rise of Oil sands development would never end. Individuals were in on it as well as all levels of Govt. There was little rational discussion/criticism other than by environmentalists, and they were simply dismissed out of hand.
I mentioned this before on this forum. 2 summers ago I took an Oil Sands construction superintendent fishing. He was avidly watching the sidewinders sorting logs and the dryland log sort processing log trucks. I remarked to him that 40 years ago the same money and gold-rush mentality was present in our forest industry, but now people are lucky to have a job with a decent wage. I also told him that most employees now worked as contractors and that this would happen in the Oil Sands as the construction rush wound down. He didn’t believe me and said as much.
Booms always wind down. Real estate splurges always decline, until they start up somewhere else for other reasons. I have absolutely no idea why Calgarians and Albertans, in general, talked themselves into an alternate reality.
Reality bites.
Friends of mine who believed the boom would never end failed to save money, invest wisely, or plan for a different future. Now, they are angry….blaming the wrong people for their own gullibility.
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.” Friends of mine who believed the boom would never end failed to save money, invest wisely, or plan for a different future. ”
And we ( responsible people) will be bailing them out, whether individually or money to the banks. That is what angers me the most.
I remember a family 3 children, 4 bedroom home, swimming pool, 2 new leased SUV’s living far better than me without a penny in their pocket and Not One Penny saved for their childrens tuition, complaining they could not pay their mortgage that was 95 % financed and could not sell because the house price went down.
Well that is todays society corporate and personal, short term gain with no consideration for the future.
It was never a question of why, it was a question of when, when all the new development in oil drove Canada forward, they did not think at some point additional production would reduce price ?
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On a positive note, Alberta still has salaries 20% above the Canadian average, the infrastructure in Calgary is world leading, the city is still growing; it’ll come back. Check out the prices of penthouses in downtown Calgary, NYC standard for rock bottom prices….of course, there is the winter weather to contend with.
In 2009: A Boom in Office Towers in Calgary:
http://www.nytimes.com/2009/01/21/business/21calgary.html?_r=0
Wolf,
I’d love to share this (and other) article on Facebook/LinkedIn. A graphic–any graphic, eg, from Wikimedia–accompanying the articles would help attract readers to those articles.
Sam
Thanks, Sam.
I hear this request for pics quite a bit. But WS philosophy is this (and it seems to be working):
“An excellent headline is worth a thousand pictures.”
:-]
Interesting, how several comments on the lack of savings, and a more conserving life style among those in the oil patch.
Just curious how many seniors could withstand a 20-25% cut to their social security benefits, as predicted, a decade or decade and a half from now. How many ‘others’ in the working world are trying their best to make adequate provisions for their own futures? From the statistics I’ve seen dam appear to be taking advantages of both tax deferment, or tax avoidance.
I don’t see government bailing anybody out of faulty planning.
Even the industry is fighting the Dept. of Labor’s new rules on handling employee’s retirement money by acting as a fiduciary – doing what’s in the client’s best interest, not theirs.
Let us just hope these retirees need not face a long, and destitute retirement.
When my son was on the last legs of his electrical apprenticeship in Calgary he worked under a journeyman named Mario. Mario was old school Italian, and wisely saved a great deal of his money. His house was paid for and he had rec. property northwest of town. As a dad, I could not have asked for a better mentor for my son. Son is now 32 with his own business, and finally understands Dad and what I tried to teach. Mario was a big help, as well as watching his friends struggling because they did not plan for any downturn.
I worked for years with often spotty employment. Uncertainty teaches one to be wary. My retired wife and I could certainly withstand a 50% drop in our pensions. It would be tough, but we could do it simply because of our lifestyle.
I would assume Mario could as well. In fact, he is probably buying more property.
i like the old school. has stamina.
I just got this ad about some kind of house flipping thingy, on this very article about the collapsing commercial real estate in Calgary, with perfect deadpan Google humor – just hilarious:
Is flipping houses the end game? We will all just flip houses to each other? And watch TV shows about flipping houses to each other? House flipping apps? Sounds almost too good to be true.
As Dave Berry says, “Getting rich by becoming wealthy making big money in real estate.”
Ha ha !!….yea…..just click here…… IT’s FREEEEEEEEEEEEEEEE
Well Calgary might have a lot going for except for the weather!!
Sorry, folks, but I really wonder who would want to buy a condo in a converted office building and put up with snow and seven months of average min temps of below zero for 7 months of the year……..
And I wonder when the ‘doom and gloom’ is going to move from commercial real estate to residential real estate.
I took a look at some of the houses for sale in Calgary and well, if the average house price in Calgary is C$557,000 then we here in Melbourne , Australia are not having a ‘bubble.’
Wish we had those low Canadian rates for real estate loans though. We are still paying some of the highest rates in the world for property. Average ARM’s are still around the 5% level………
I thought that Australian real estate was costly compared to the ROW, but after looking at what you get in Calgary, then
Lee, I was born in Calgary, and I’ve been to Australia so I know it would be cold for you but it’s not that bad thanks to global warming I guess. We also get a weather phenomena called a Chinook that can change the temperature extremely quickly and last for days or weeks at +10 to 20 C. Compared to when I was a kid we don’t get much snowfall anymore either. As far as housing prices, it sucks. Prices have only dropped under 2% overall, and most of that is in the high end market. Some people are waiting for the bubble to burst, but would likely happen in Toronto or Vancouver first. I watch cable tv and see people purchasing houses in the states at about 1/2 or 1/3 of a similar house in Calgary.